11 Things You May Not Know About Your IRA
One of the most important features of your individual retirement account (IRA) is the fact that it is an "individual" account. You can customize your deposits, take withdrawals when you want to, and you are responsible for paying taxes on distributions. You can even control what happens to it after you die. Want to take advantage of all that your IRA has to offer? Read on for some little-known features that will help you get the most out of your contributions.
1. You can contribute to more than one IRA.
It is possible to end up with more than one IRA for a number of reasons. For example:
- You had an existing Roth IRA and then rolled an old 401(k) into a Traditional IRA.
- Your adjusted gross income (AGI) rose to the point where you were no longer eligible to contribute to your Roth IRA, so you opened a Traditional IRA.
- You inherited an IRA from a loved one, but you already had one of your own.
- You maintained your Roth IRA and opened a Traditional IRA to take advantage of tax deductions.
Contribute to as many IRAs as you want, but the total deposited in all IRAs is limited to the annual maximum amount. For example, the annual maximum contribution for 2011 is $5,000. So, if Bob deposits $2,000 into his Traditional IRA, he can contribute no more than $3,000 to his Roth account during the same year. (For more insight, read IRA Contributions: Eligibility And Deadlines.)
2. All Regular IRA contributions must be made in cash.
When making your regular contribution to your IRA for the year, this must be done in cash. This limitation does not apply to the distribution of securities that are rolled over, as these must generally be rolled over in kind.
3. IRA losses may be tax deductible.
One of the main advantages of an IRA account is the ability to defer taxes on gains and investment income. You can't use losses inside the IRA to offset gains, but if you distribute the total balance from your traditional IRAs and the amount is less than your basis in the account, you can deduct that loss. (For related reading, seeDeducting Losses on Your IRA Investments.)
More specifically, the IRS allows you to deduct losses on a Traditional IRA with the following caveats:
- When you are have completely withdrawn all funds from all of your traditional, SEP and SIMPLE IRAs during the year and the total amount of basis is less than the total amount distributed and
- Like other miscellaneous deductions, you can only deduct up to 2% of AGI
4. You control your required minimum distributions.
Traditional IRA owners must begin taking required minimum distribution (RMD) by April 1 of the year after they turn 70.5 years old. The minimum amount distributed is based on the balance of the account on December 31 of the previous year and the owner's life expectancy. For each year thereafter, the RMD must be withdrawn. (To learn more, see An Overview Of Retirement Plan RMDs.)
If you have multiple Traditional IRAs, you don't have to take RMDs from all of them. You can combine the total RMD amounts for each of your IRAs, and take the total from one IRA or a combination of IRAs. For example, you may prefer to liquidate the investments in one IRA over the investments in another. (For more on RMDs, see Avoiding RMD Pitfalls, Strategic Ways To Distribute Your RMD and Preparing For RMD Season.)
5. All beneficiaries are not created equal.
One of the benefits of owning an IRA is the ability to transfer funds directly to beneficiaries without going through probate. Spousal beneficiaries can claim inherited IRAs as their own, a flexibility which allows the spouse to make new contributions to the IRA and control distributions.
Non-spousal beneficiaries cannot treat inherited IRAs as their own. They can't add to them and they must completely liquidate the account within five years of the death of the owner, or distribute the amounts over their life expectancies. Generally, the distribution options available depend on the age at which the IRA owner dies. Keep this in mind if you plan to leave IRA assets to your children or grandchildren. (To learn more, read Leaving Inheritance To Children Easier Said Than Done and Don't Forget The Beneficiary Form.)
6. You don't need a reason to transfer or roll over your IRA.
It is common for individuals to move accounts from one financial institution to another. If you just decide to maintain the same type of IRA account with a different company, you can move the assets as a transfer or as a rollover.
With a transfer, the assets are delivered directly from one financial institution to the other, and the transactions are not reported to the IRS.
A rollover involves taking a distribution of the assets to yourself, and rolling over the amount within 60 days. You can also roll over your IRA assets to another type of retirement account, such as a 401(k), if such rollovers are allowed under the 401(k) plan. The plan would determine whether the rollover can be done as a 60-day rollover, or if the funds must be paid directly to the plan. (For more on rollovers, see Common IRA Rollover Mistakes.)
7. You can deduct IRA fees from your taxes.
Financial services firms may charge annual fees on top of transaction fees for the purchase or sale of investments. In addition, they may charge administrative fees, which you may be able to deduct using 1040 Schedule A. Whether fees are deductible depends on whether they are paid with funds from within your IRA or with funds from outside of your IRA. (For related reading, see An Overview Of Itemized Deductions and The Rap On Wrap Fees For Retirement Accounts.)
8. Your IRA can be an annuity.
Your annuity can operate under the same rules as an IRA, if the funding vehicle is an Individual Retirement Annuity. One benefit is that annuity policies were designed to provide retirement income for life. (For more on annuities, see An Overview Of Annuities.)
9. IRAs can be managed accounts.
Brokerage accounts allow you to give your financial advisor written authorization to make investing decisions and routine transactions without notifying you first. Often, a flat fee is charged for managing the account. This type of activity is allowed for IRAs, provided your broker has an agreement with you to allow such actions.
10. Investment options for your IRA are limited.
The IRS limits which investment types can be held in an IRA, but your financial institution may have additional asset restrictions. For example, the IRS allows some gold and silver coins, but most financial institutions will not. Similarly, some mutual fund companies so not allow individual stocks to be held in their IRAs. (For related reading, see IRA Assets And Alternative Investments.)
11. Age is just a number.
Anyone who is under the age of 70.5 for the year and is paid a salary, tips or hourly wages for their work (earned income) can contribute to a traditional IRA, including minors. This means your children can start saving for retirement as soon as they get their first jobs. An IRA is an excellent option for kids who earn more than they intend to spend, because it allows long-term tax-deferred savings. The tax penalty for early distributions will encourage your kids to defer taking distributions from the IRA, while offering the ability to use funds for college or to use up to $10,000 towards buying their first home without penalty. It also teaches your children the value of investing at an early age. (For more on setting up a savings plan for a child, see Savings Plans For Minors.)
Senior citizens can continue to contribute to Roth IRA accounts indefinitely. This is an excellent account for money that will eventually pass as an inheritance. However, once you reach age 70.5, you can no longer make regular IRA contributions to Traditional IRAs.
Individual retirement accounts have built-in flexibilities. Understanding how the various features work can help you tailor your retirement savings to meet your needs.
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